2011 U.S. Debt Ceiling Crisis

What Is the 2011 U.S. Debt Ceiling Crisis?

The 2011 U.S. Debt Ceiling Crisis was a contentious debate in Congress that occurred in July 2011 regarding the maximum amount of borrowing the federal government should be allowed to undertake.

Understanding the 2011 U.S. Debt Ceiling Crisis

The federal government has rarely achieved a balanced budget and its budget deficit ballooned following the 2007-08 Financial Crisis and the Great Recession. In the 2008 fiscal year, the deficit stood at $458.6 billon, widening to $1.4 trillion in 2009 as the government engaged in a massive fiscal policy response to the economic downturn.

Between 2008 and 2010, Congress raised the debt ceiling from $10.6 trillion to $14.3 trillion. Then in 2011, as the economy showed early signs of recovery and federal debt approached its limit once again, negotiations began in Congress to balance spending priorities against the ever-rising debt burden. 

Heated debate ensued, pitting proponents of spending and debt against fiscal conservatives. Pro-debt politicians argued that failing to raise the limit would require immediate cuts to spending already authorized by Congress, which could result in late, partial, or missed payments to Social Security and Medicare recipients, government employees, and government contractors.

Moreover, they asserted the Treasury could suspend interest payments on existing debt rather than withhold funds committed to federal programs. The prospect of cutting back on already promised spending was labeled a crisis by debt proponents. On the other hand, the specter of a technical default on existing Treasury debt roiled financial markets. Fiscal conservatives argued that any debt limit increase should come with constraints on the growth of federal spending and debt accumulation.

Outcome of the 2011 U.S. Debt Ceiling Crisis

Congress resolved the debt ceiling crisis by passing the Budget Control Act of 2011, which became law on August 2, 2011. This act allowed the debt ceiling to be raised by $2.4 trillion in two phases. In the first phase, a $400 billion increase would occur immediately, followed by another $500 billion unless Congress disapproved it. The second phase allowed for an increase of between $1.2 trillion and $1.5 trillion, also subject to Congressional disapproval. In return, the act included $900 billion in slowdowns in planned spending increases over a 10-year period and established a special committee to discuss additional spending cuts.

In effect, the legislation raised the debt ceiling from $14.3 trillion to $16.4 trillion by January 27, 2012.

Following the passage of the act, Standard and Poor's took the radical step of downgrading the United States long-term credit rating from AAA to AA+, even though the U.S. did not default. The credit rating agency cited the unimpressive size of deficit reduction plans relative to the likely future prospects for politically driven spending and debt accumulation.

Debt Approval Process Leading to the 2011 U.S. Debt Ceiling Crisis

The U.S. Constitution gives Congress the power to borrow money. Before 1917, this power was exercised by Congress authorizing the Treasury to borrow specified amounts of debt to fund limited expenses, such as war-time military spending that would be repaid after the end of hostilities. This kept the national debt directly linked to authorized spending.

In 1917, Congress imposed a limit on federal debt as well as individual issuance limits. In 1939, Congress gave the Treasury more flexibility in how it managed the overall structure of federal debt, giving it an aggregate limit to work within. However, by delegating debt management authority to the Treasury, Congress was able to break the direct connection between authorized spending and the debt that finances it.